Current and Future Homeowners Handed a Victory in Gardner v. Department of Treasury

Last summer, current and future home sellers were handed a victory by the Michigan Supreme Court following its ruling in Gardner v. Department of Treasury. Gardner arose after the sale of several principal residences by the petitioners during a depressed real estate market. As required under the State Real Estate Transfer Tax Act (SRETTA), MCL 207.521, et seq., the petitioners paid a transfer tax following the sale of their properties.[1] Reflecting the real estate market at the time of sale, the petitioner’s sold their residences for prices well below the value when they were originally purchased. Thus, the petitioners requested a refund from the Department of Treasury under an exemption to the transfer tax provided by MCL 207.526(u). Under this subdivision, a seller or transferor is entitled to an exemption from the transfer tax provided, “the state equalized value of that property is equal or lesser than the state equalized value on the date of purchase or on the date of acquisition by the seller or transferor for that same interest.” The state equalized value (SEV) of property is one half of a property’s “true cash value.”[2] MCL 207.526(u) was enacted to protect sellers in the event of sale in a declining or depressed real estate market as long as sales or transfers were done through legitimate arm’s-length transactions.

The respondent (Treasury) denied the petitioner’s request for exemption on the basis that the properties had been sold for more than the “true cash value” of the properties. The Treasury defined “true cash value” as being two times the property’s SEV in the year of sale. The petitioner’s appealed to the Tax Tribunal which found in favor of the petitioners since allowing the exemption only when a sale is for exactly twice the SEV was not the Legislature’s intent. The Court of Appeals agreed with the respondent’s interpretation of “true cash value” and overturned the decision of the Tax Tribunal.

There was no dispute in this case the SEV of the petitioners’ residences had declined since their purchase; rather, the main cause of contention in this case was determining the meaning of “true cash value” included in MCL 207.526(u). The petitioners argued “true cash value” should be defined identically to “fair market value,” meaning the price a willing buyer and a willing seller would reasonably arrive at in an arm’s-length negotiation. As stated previously, the respondent (Treasury) asserted “true cash value” should always mean twice the value of the SEV in the tax year of sale or transfer. The Court of Appeals agreed with the Treasury, but the Supreme Court, in agreement with the petitioners, found “true cash value” to be synonymous with fair market value. The Court further found there was “no basis, textually or logically” to require a seller to demonstrate the sale price of their property was exactly twice the value of its SEV. The Court ruled in favor of the petitioners since they provided market evidence to suggest their sales had been for fair market value in arm’s-length transactions.

The main import of this ruling is that any taxpayer who has sold, or will sell, their principal residence may be entitled to the exemption under MCL 207.526(u) provided the sale is 1) an arm’s length transaction at the property’s fair market value and 2) the SEV at the time of sale is less than or equal to the SEV at the time of acquisition of the property. The likely impact is more sellers will be able to qualify for the section (u) exemption.

Update: MCL 207.526(u) has been rewritten since this decision was handed down. The new amendment is as follows:

A written instrument conveying an interest in property for which an exemption is claimed under section 7cc of the general property tax act, 1893 PA 206, MCL 211.7cc, if the state equalized valuation of that property is equal to or lesser than the state equalized valuation on the date of purchase or on the date of acquisition by the seller or transferor for that same interest in property and the transaction was for a price at which a willing buyer and a willing seller would arrive through an arms-length negotiation. Notwithstanding section 22 of 1941 PA 122, MCL 205.22, and section 3(4) of this act, if the seller or the buyer who has paid the tax on behalf of the seller believes that the property was eligible for an exemption under this subdivision at the time of transfer, the seller or the buyer who has paid the tax on behalf of the seller may request a refund from the department in a form and manner determined by the department. This subdivision is retroactive and applies to a sale, exchange, assignment, or transfer on or after June 24, 2011.

The significance of this amendment is its reflection of the Supreme Court’s ruling by replacing the ambiguity of the penalty clause language and any reference to “true cash value” and replacing it with the sentence that is bolded above. The new language is also void of the 20% penalty clause referenced Gardner included in the former writing of MCL 207.526(u). This amended, rewritten, section was effective December 15, 2015.